tv Options Action CNBC August 19, 2012 6:00am-6:30am EDT
now you stay safe. bye-bye. this is "options action". tonight, weakness at tiffany's. they are teaming up for a trade that could make six times your money in just three months. it ain't in any blue box, but the options trade on the retailer, and they'll tell you how to make money on the trade too. >> plus, talk about a yummy trade. dan nathan has an options trade on yum brands that could make you seven times your money by october. he'll break it down. and why were all the options traders hunting for huntsman calls? scott takes aim. the action begins right now. live from the nasdaq markets, i'm melissa lee. these are the traders here on this desk. we get to the trades in a
moment. the only thing hotter than the weather here is the stock market. the dow hitting lows not seen since 2007. how much longer can this rally run? let's get in the money and find out. we start with a desk skeptic. he is the most skeptical on the desk. everybody is skeptical. home builders, oil stocks, and apple making a 52-week high today. what's wrong with that, dan? >> listen, everything is great. to be a skeptic of this market is a bit exhausting. i'm pretty much ready to throw my hands in the air. you think about, you mentioned things acting very well. technical setup looks very good. in general, people feel better than they did two months ago. we're seeing that in sentiment readings. when i look at the concentration of the top ten names, they make 20% of the weighting of the entire index. ten names. seven of those are actually at 52-week or all-time highs. a small amount of stocks driving a great bit of performance.
we have a chart here. if you look at the composite index, the bottom right hand, new highs across all major indices are at major lows relative to where the s & p was if you look at the highs back in 2007, the readings were much, much higher. to me, the rally is getting narrower and narrower. there is risk to that. >> to some extent, past rallies, haven't they also been led by a handful of stocks? a certain number of sectors outperforming the rest of the market? i mean, yes, we're used to it being financials, technology and energy, but so what. it's consumer staples this time. utilities? >> utilities, there is a sector i would sell outright. i can't understand why someone wants to own a duke energy trading at 20 times earnings and zero growth potential. or verizon, trading 18 times earnings. the only reason people plowed in, they served as an inflation adjusted fund.
you can't justify that when you see rates rebound. i think the other thing that really worries me is that you see the vix as very long term lows right here. take a look at the cost of an s & p straddle. in both directions out to the end of september that is an implied correlation. all the single stocks came down. for the first four hours of today, the only thing i saw were options sellers. nobody is concerned about anything. i think they are asleep. >> it's a friday in august. dan said that being a permanent bear has been exhausting. it has also been expensive. i think the names we've talked about are some of the names you would hope to make 52-highs if you expect the market to go higher. home builders, tech, energy, those are the names you want to see do well. and mike was right on the money. the vix has just gotten killed. pulled down by the twin anchors
of the calendacalendar. there is not a lot of realized volatility. which is what you get when you buy options. it was interesting on monday that the vix was lower on a monday with the s&p lower. that only happened about twice a year. the vix has got know killed it will get killed when people come back from vacation in september. >> people talked earlier this year about a performance chase and how much cash there was. that little put that you have to equity prices has declined. we're close to all-time lows on amount of cash on mutual fund balance sheets. all of the stuff that you have to worry about that can cause cracks to get more severe. >> if you are worried about the stock market. you may be worried about consumer discretionary in particular. we'll talk about tiffany's in a bit. a lot of those stocks have
already cracked. i want to focus on a name that has not cracked. >> i want to focus on yum. i'm concerned about the u.s. consumer. you think about yum. they said a few weeks ago, everything is okay. also last week, mcdonald's same-store sales down. in u.s., europe and asia, the first time since 2004, chipotle, an absolute superstar, 100% domestically focused, are feeling a pinch. i want to focus atrium, here is a number we haven't mentioned yet. china yum gets 43% of growth from china. the chinese market is telling us something. shanghai, three-year lows, data doesn't get better out of china i want to focus this name in the near term. >> dan is bearish. we use this strategy a lot. on hiatus two weeks.
good to open the playbook, see how this works. how do you make money? you want the stock to fall to the short put strike. that's where you make the most money. that's also where your profits are capped. dan, walk us thought trade. >> i want to buy a put spread in october, and it will catch q 3 earnings. much more expensive than mcdonald's, mcdonald's can't get out of its own way on a technical basis. i bought the october 62 half, 55 put spread for $1.10. one of the october 62 half puts for $1.40. i sold one on the october 55 puts and max risk is $110 i make money between 61.40 and 55 my max gain, 55 or lower, and i can lose up to 1.10, between 61.40 and 62 half and above 62 half, i
lose the entire $1.10. >> do you buy the notion that the shanghai composite is telling us something about the chinese consumer and his or her willingness to buy chicken legs and pizza hut? >> yes, i do. >> first of all, look. when you have rapidly growing economies, they tend to move in fits and starts. the data that we are getting is suggesting that things are not that great. you have to factor that into expectations. for companies doing a lot of business there. the other thing i would say, and it's interesting, we will probably talk about strategies similar to the one dab has her. how low volatility is, that doesn't necessarily mean that put spreads don't make much sense, the vot tillity can come in a great deal, but the puts could have a good deal to them that makes the math work even better. >> that tells you as much about china as anything. maybe that means things in china are not as bad this one really
sings in that regard but this one does have to break a bunch. about 8% before you get to the first strike. >> i want to ask you about using october specifically, dan. it seems to be not enough time to let the trade work out. in the time period, we might expect a round of central bank easing from here in the united states or in china it will lift all votes, including yum. >> i'm not expecting to hear -- the ecb stuff and some of the data out of china, suggests they may wait a little bit. they cut rates twice. they have lowered bank reserve ratios. to me, if nothing happens, october may be the perfect time. >> it catches the next quarter's earnings. >> good point there. let's button this trade up. little stock versus options. want to short yum, the financial equivalent of food poisoning. shorting carries unlimited risk.
i forgot how melodramatic we are on this show. and the high-end consumer test will come next week with the release of tiffany earnings. current options prices imply a 5% move on earnings. that is less than the historical average. a big move nonetheless. the question, of course, is in what direction. let's try and get some answers. awe call to the charts with a man that still harbors a crush on holly go lightly. hi, carter. >> hi, there. so three charts all five year time frames. let's have a look. this is tiffanys. '09 low. 15.85. a well-defined up trend. and the last 18 months, we've broken trend. this is the same five-year chart, bullish to bearish reversal, topping out if you will. what's make it interesting as a
sale here, let's look at the third chart, the recent strength, meaning the stock has bounced from about 50 to 61, at today's close. up 21% with the market bounce. this bounce puts it down the down trend line since it topped out. it's right to sell into the anticipation of news related drop specifically better. >> sell into the strengths of the move looks downward. do you agree fundamentally, mike? >> i think i would. it's trading at a slight premium to the market multiple. a lot of people loo look at this being more immune. high end consumers don't tend to have the same lumps and bumps the rest of us might. a couple interesting dynamics here. some of the costs relative to when we have been able to sell things have been going up. some margin compression. some of the highest products tend to be silver. lower priced items.
and they have a licensing deal with peretti, in may, they talked about the fact that they were having trouble renegotiating that. that represents is 1 0% of sales, and that is the highest margin of business they are doing. that puts a little pressure on it. >> and that's the only reason why dan goes into tiffany, right? mike is obviously bearish and using a one by two put spread. don't use this very often. let's crack open the playbook and in the strategy, buy one put, offset cost by selling two lower strike puts of the same expirati expiration. want the stock to go above the strike of the puts that you are short. since are you short more puts than are you long, may have to buy stock at the low strike price. this will tie up cash. what's the trade? >> i am looking at buying the november 60 puts, paying $3.40, and selling 52 1/2 strike puts for $is 1.10 a piece.
net debit $1.10. i need to to run through at least that much. i make the most with the stock at 52.5 bucks. and if it declined too much, i could potentially own the stock at a net price of 46.5 bucks, but that's pretty significant, more than a 25% discount from where we are right now. >> in this environment, do you want be short the extra put? >> see, i don't. to me, sheer one thing. i can't agree with these guys more about everything they just said. 35% of sales came from asia china, a big growth area for them this fits into the thesis, i can't agree more. i can't sell two puts. i like the structure, cost. the risk reward makes expense. >> marginal, i have to agree. monetary policy, being a put to the market. something we were talking about on the desk today. maybe one of the reasons why
volatility is low as it is who wants to go out and buy insurance? i think that combined with the fact that we haven't seen that kind of significant decline in revenues for tiffany's is one of the things that will protect it from a really accelerated decline. >> a couple of things about this, in general, you make the most money when the market goes to the short strike. exactly what happens here. we talk about how put spreads can make the math work for you. works in your favor. math doesn't work for you here, your indentured servant. it has to drop so far before you quit the stock put to you in a great name you are probably throng buy at a discount. >> lots of beautiful items at chif knee's. great jewelry, underrated handbags, nice shades. and you won't find this in a blue box. shorts versus options. we risk $120.
worst-case scenario, buy the stock for $52.50. send us an e-mail. options action@cnbc. we'll answer it right after the show on our website, objectionsaction.cnbc.com. check it out. here what's coming up next. this trade could use some social work. last month, mike made a bearish bet on linkedin. the stock has gone nowhere fast. money on the line and expiration just around the corner. will he hold out for gains? time for pump up the volume. the areas heating up sizzle index. this company makes chemical and chemical formulations. it found political, founded by the father of a republican primary contender it could be bought by the company romney used to run. it created reaction in the hopes that bain will elect to make the
acquisition. who is it? the abc when "options action" returns. [ male announcer ] trading's like a high-speed train. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.
successful trades. a couple weeks back, mike made a bearish trade on linkedin. he is not losing out on much money, here is why. >> just because you risk less does not mean you will always make more. unfortunately, that's what happened with mike's bearish trade on linkedin. mike couldn't believe how expensive linked in shares were. >> it's trading at a valuation of $11 billion. that is an astronomical valuati valuation. >> but shorting the stock? this ain't facebook and shorting linked in could put you out a lot of cash. >> still doing a lot of work. >> so to define his risk, mike bought the strike put for $5.90. to make money, mike needs the stock to fall below that put strike price by more than the cost of the trade, or below $89.10 by september expiration. spending almost 6 bucks to get short this networking site? not unless we want a dot-come
bust. let's find a way to do this for less. >> sell the 75 for $1.30. >> he created his put spread by selling the strike price for $1.30. but he did something better. he made profits come sooner and all it took was simple math. how is that? between 5.90 buying one put and the $1.30 selling the other, he cut costs to $4.60. instead of needing linkedin shares to fall below $89.10 to make money, he can see profited if they fall below $90.40 by september expiration. but there is a tradeoff. and by selling, mike has capped the gain. to the difference between the strike of the put that he bought and the strike of put he sold. good thing he did cut those costs. linked in shares are flat,
making this trade a loser. fans from across the web are linking into the show and want to know the same thing. what will mike do now. >> before we answer this question, perhaps this might make us feel a little better. options versus options. where we drill down on why we talk at these strategies. had he just bought the strike put, he would have lost 60% of his money. but by using a put spread he was able to reduce his costs. if he would close the trade, looking at a loss of 50%, not great, but not as bad. of course, linked in is a volatile stock. what do you do? >> one of the things, we have expressed real skepticism here. especially the high flying stocks, the thing about the lower strike put is it's offered around a dime. we definitely want to cover the down strike put. >> i think this thing has a great chance. let me tell you something. they managed their lock up expiration pretty well.
>> we're calling mike out. you have to cover the downside put. let me tell you something. this company, they managed lockup expiration pretty well. did a secondary when the stock was up. the stock is more than doubled from their ipo a year ago. if i were these guys, i would be doing another secondary raising cash. their equity currency is funny money. so to me, that poses potential risk. >> a great way to torpedo stock price. >> if they are looking around and looking at every internet ifrp pipo that has gotten destroyed, i want to protect my balance sheet very well. >> it hit a new low on today's session, touching $19 even intraday. dan, is there any point at which you would say this stock is a buy? >> to me there is one specific thing and that's it. we have 400 million shares coming on november.
they are going to be sold again. so to me, i think there is one thing to get the stock higher. a merger with twitter. >> if you're convinced this is going to move lower, would you put like a put spread on? >> i think you got to wait. >> there is a lot of head winds on the stock, a lot of volatility on the stock. one of the few names where there is some prepremium to the options. where would i buy the stock? i don't know. 20 to 25 earnings, a significant discount to where it's trading right now. >> they actually make money. they are getting tarred. with the groupon brush right now. >> all right. speaking of social media this is a reminder as we head to break. be sure to follow us on twitter. dan posts regular updates on his
tra trades. got the final call right after this. itrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.
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season early. the 2012 radio city christmas spectacular. they kicked off a display of costumes worn throughout the years. santa there as well, of course. the celebration took over new york's sixth avenue. a little early to be thinking about that, but whatever. time for the final call. >> this week's web extra is all about jc penney. takeover story. the way you want to play the upside and get the back-to-school and holiday season. >> dan. >> the market is real complacent here but i want to look to something where they are telling us something. to me, i like tiffany's. you like my yum. i want to press those shorts. >> mike? >> i'm definitely inclined to try to make bearish bets. take advantage of low implied volatility and options. if you can't get that into the portfolio on a stock specific base, buy puts in spy, options are so cheap, you will be xwlad you did.
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